The EUR/USD pair has experienced a significant decline, losing 2% over the past five sessions, as the dollar continues to strengthen. This movement has placed the euro in a sustained bearish zone, with the pair breaching a critical support level at 1.0550 and intensifying selling momentum.

Dollar Strength Boosted by Fed Policies

The Federal Reserve’s recent decision to slow the pace of interest rate cuts has bolstered the dollar, supporting its strength over the long term. In its final meeting of the year, the Fed adjusted rates to a range of 4.25%-4.5%, a 25 basis point cut aimed at stimulating the U.S. economy in early 2025.

Despite this move, Fed Chair Jerome Powell emphasized that inflation, while significantly reduced, remains above the target. Current projections place inflation at 2.5% for 2025, underscoring the central bank’s cautious approach. These policies, along with the Fed’s commitment to maintaining higher rates, have created a favorable environment for the dollar, placing additional pressure on the euro.

The CME Group’s probability tool reflects a 91% likelihood of unchanged rates at the Fed’s next meeting in January, and a nearly even split for March between maintaining rates and a possible reduction. This outlook supports the narrative of continued dollar strength.

Interest Rate Differential and Impact on EUR/USD

The interest rate gap between the U.S. and the Eurozone remains a significant factor driving the EUR/USD downtrend. With the Fed rate at 4.5% compared to the European Central Bank’s 3.15%, U.S. fixed-income assets are more attractive to investors, further boosting demand for the dollar and sustaining bearish pressure on the euro.

EUR/USD Technical Outlook

Downtrend Channel

The EUR/USD continues to trade within a well-defined downtrend channel, with no significant breakout threatening this bearish pattern. The pair has approached a key support level at 1.03, representing the lows last seen in November.

• Support Level at 1.03: This crucial support zone has historically been an area of indecision and could act as a trigger for bullish corrections if the downtrend momentum weakens.
• Resistance Level at 1.0550: The breached support now serves as a resistance zone, aligning with the lower boundary of the previous lateral range and the Ichimoku cloud. A move above this level could weaken the current bearish channel and signal potential recovery.

RSI Indicator

The Relative Strength Index (RSI) remains below 50, reflecting the dominance of bearish momentum. However, with the RSI nearing oversold territory around 20, the possibility of momentum exhaustion could open the door to short-term bullish corrections near the 1.03 support level.

Key Levels to Watch

• 1.03: The current support level is critical for maintaining the downtrend. A breach below this level could lead to further declines and reinforce the bearish bias.
• 1.0550: This resistance zone is pivotal for determining whether the bearish channel remains intact or a potential breakout occurs.

Conclusion

The EUR/USD outlook remains bearish as the pair continues to break key support zones under the weight of dollar strength. The Fed’s monetary policies, combined with interest rate differentials, are likely to sustain the downward pressure on the euro. However, the oversold conditions on technical indicators like the RSI suggest that short-term bullish corrections are possible.

Traders should monitor the 1.03 support level and 1.0550 resistance zone for signs of potential reversals or continued bearish momentum.